The 2-Minute Thought: Amazon’s Shareholder Letters

Amazon’s shareholder letter for 2017 isn’t out yet, but it will be soon, and if you haven’t been a regular reader of Amazon’s letters, it might be worth looking out for it.

Even if you’re not an Amazon investor or fan, these yearly letters are fascinating.  The classic letter (and the most famous one) is the very first one from 1997.  It is Amazon’s pledge to win over the long term and not worry about the short term. 

In 1997, it was pretty hard to know what winning over the long term meant (it’s easier to see now).  But in that 1997 letter, CEO Jeff Bezos makes it clear that Amazon will focus resolutely on long-term market leadership, not short-term profitability.  He says Amazon will never choose better-looking GAAP earnings over building for the future.  He says Amazon will make bold investments and expect some to fail.  He says Amazon will obsess over what customers really want.

It would be hard to argue that Amazon hasn’t stayed true to that 1997 letter (in fact, every year, it appends a copy of the 1997 letter to the current year’s letter as a reminder).  Over the years, Amazon has been willfully indifferent to quarterly earnings.  It has achieved market dominance.  It has given things to customers they didn’t dare imagine wanting before but now can’t live without (that package that is at your door almost before you realize you’ve clicked “Buy”).  It has invested boldly.   

Look back over the annual letters and you’ll see things that didn’t work (e.g., Auctions).  You’ll also see things that succeeded way beyond expectation.  Amazon Web Services – that was audacious.  Now it’s a $17.5 billion business.  Amazon Prime?  What a crazy, crazy idea to offer all-you-can-eat shipping for a single price.  Who knew it would conquer the world?

Read the annual letters and you might start to feel lazy.  Take the 2015 letter’s description of how Amazon approached offering Marketplace to third-party sellers in India:

“Last year we ran a program called Amazon Chai Cart where we deployed three-wheeled mobile carts to navigate in a city’s business districts, serve tea, water and lemon juice to small business owners and teach them about selling online.  In a period of four months, the team traveled 15,280 km across 31 cities, served 37,200 cups of tea and engaged with over 10,000 sellers.” 

The result of that effort was that it built Amazon Tatkal, which enables small businesses in India to get their products online and for sale in less than 60 minutes.

Amazon used to frustrate me because it didn’t play by the rules.  What kind of company doesn’t worry about making money?  I mean, where are the cash flows to justify this stock price, right?  But then over time, I realized that Amazon was something “other” -- an enigma.  And then I realized that I was just dumb.  Amazon was smart.  I was dumb.   Amazon changed the rules.  It changed the game altogether.

In last year’s shareholder letter (for 2016), the thing that stood out to me most was Bezos’s statement that you should “embrace powerful trends quickly.”  In other words, the outside world is changing.  Embrace the big external trends, and you’ll get a tailwind.  Ignore them, and you’ll end up fighting the future. 

Simple enough, right?  And yet, Bezos says, big organizations find it strangely hard to embrace the big trends, even though they are “not that hard to spot (they get talked and written about a lot”). 

How true that is.  Of the 18 – 20 stocks I’ve looked at so far this year, I’d say that quite a few have been swimming upstream for a long time without facing the music.  While it’s true that I’m a value investor who gravitates toward the unpopular companies that are down-and-out, maybe no more than six of the companies I’ve looked at could be described as truly embracing what is going on in the big wide world.  Of those, two are technology companies at the forefront of their markets.  The remaining four, surprisingly, are retailers.  Of course, they are only embracing the way of the world because Amazon has forced them to.  The big trend they have had to embrace is that Amazon has changed everything.

Please Note: The 2-Minute Thought will be on break for two weeks and will return on May 3.